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Why You Should Be Worried By Today’s Huge Amounts of Stock Market Investor Margin Debt

Why You Should Be Worried By Today’s Huge Amounts of Stock Market Investor Margin Debt.  As you can see from the chart below, margin debt is extraordinarily high, even after the pull back from the recent liquidation.  In fact, the sum total of  investor negative credit balances are huge, even compared to days of the tech and the housing  bubble.  That’s very worrisome from a contrarian point of view because high negative credit balances, when investors are at their most optimistic,  occur at some point before a major market break.  Moreover, the huge level of margin debt also mean any downward moves will be significantly exacerbated by forced margin selling. These most likely occurred in march,  when over-extended investors can’t meet broker margin calls.  Thus, leaving plenty of margin left to be eliminated until we can to a  positive credit balance. Similar to the 2003 and 2008 lows.  Strong bull market occur when investors are very frightened. That’s when margin shrinks significantly, and credit balances go from negative to a credit balance

.  We don’t see a significant bull market  occurring sometime during the next year or two until credit balances return to neutral or positive levels.

Why You Should Be Worried By Today’s Huge Amounts of Stock Market Investor Margin Debt
Why You Should Be Worried By Today’s Huge Amounts of Stock Market Investor Margin Debt

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Brad Lamensdorf

Brad Lamensdorf, the founder and portfolio manager of Active Alts, is a principal and co-manager of the AdvisorShares Ranger Equity Bear ETF. He previously managed a long-short investment partnership from 1998-2005 under the name Tarpon Capital Management. Earlier in his career Mr. Lamensdorf was an equity trader/market strategist for the Bass Brothers’ trading arm. He managed a short only portfolio in addition to co-managing a $1bil hedging program. He also served as in-house market strategist for the entire internal and external network of Bass Brothers money managers.

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